One of the worst financial mistakes you can make is living above your means. It doesn’t matter what your salary is, you should be spending less than you make in order to get ahead financially.
Unfortunately, living above your means is a very common problem in our society. It’s easy to buy things on credit and to get a false sense of financial security.
Living within or below your means doesn’t force you to deprive yourself. You simply need to prioritize and take control of where your money is going.
In this article, we’ll look at some warning signs that may indicate you’re living above your means. If several of these warning signs are evident in your own life, consider making some changes in order to improve your financial situation.
Signs That You’re Living Above Your Means
Here are the signs that you should look out for.
1. You Don’t Know How Much You Spend Each Month
If you’re not sure how much money are you spending each, there is a good chance that you’re actually spending more than you think. It’s really easy to underestimate the total of all of your expenses.
Some people cringe at the thought of a budget and prefer to not think about how much money they’re spending. Ignorance about your expenses won’t make the problem go away, it will only make it worse in the long-term.
The good news is, this problem is easy to fix. It only takes a small amount of effort to track your expenses and stay on top of your finances. You can even use a free app like Mint or Personal Capital to help make tracking expenses easier, or simply use our free printable spending log.
2. Your Credit Card Balances are Increasing
Credit card debt is one of the biggest signs of living beyond your means. Those expenses that you can’t really afford will typically go on a credit card, so checking your credit card statements is an easy way to see if you are living beyond your means.
Hopefully, you either have zero credit card debt, or your balances are at least decreasing. Zero debt is, of course, ideal. But simply having some credit card debt isn’t necessarily a sign that you’re currently living beyond your means. You may be working hard to eliminate the debt, so the trend of your balances is probably a better indicator than simply the presence of debt.
3. You Don’t Have an Emergency Fund
The emergency fund is an important part of your financial plan. Money in your emergency fund can be used to pay your bills in the case of something unexpected, like the loss of your job, major health issues, or unexpected family emergencies.
Without an emergency fund, you’ll be likely to rack up debt in these types of situations. You may also risk foreclosure, eviction, having a car repossessed, or the inability to pay your other monthly bills.
How much you should have in an emergency fund will depend on your work and family situation, but in general, you should have at least enough money to cover your living expenses for 3-6 months. If you’re in a higher-risk situation, like if you’re self-employed or supporting a family on a single income, you should be at the high end of that range.
4. You’re Not Saving at Least 10% of Your Income
According to a study done by GoBankingRates, 57% of American adults have less than $1,000 in savings (source). This is both shocking and concerning.
At a minimum, you should be saving at least 10% of your take home (after tax) income. Really, 15-20% would be more ideal, but 10% is a good place to start.
Of course, saving is often associated with planning for retirement, and investing into a 401(k) or Individual Retirement Account (IRA) is a great choice. Many employers offer a 401(k) plan and will match a certain percentage of your pay, based on what you contribute. If this is an option for you, be sure you are contributing enough to take advantage of the full match offered by your employer. Missing out on that money is like turning down a raise.
Saving money may seem impossible, but it’s probably a lot more realistic than you think. Contributions to a 401(k) or Traditional IRA can reduce your taxable income, so it can also decrease the amount that you pay in taxes.
If finances are tight and you’re having trouble finding ways to save and invest, see this list of cheap living tips that will give you plenty of practical suggestions. You’ll be able to cut your expenses and have more left over to save.
5. You Don’t Have Any Money Left at the End of the Month
If you’re constantly running out of money before the end of the month, or before your next paycheck, that’s a sign that you are living above your means.
If you’re on top of your finances and living within a budget that is appropriate for your income, you shouldn’t consistently have issues with going through your money too quickly. The emergency fund and savings are important for those times when something comes up unexpectedly.
6. You Worry About Small Expenses and Being Able to Pay the Bills
Money is a serious cause of stress for a lot of us, but if you find yourself worrying about not being able to pay your monthly bills, it could be a sign that you are not managing your money effectively. Likewise, if you worry even about small expenses, you may need to make some adjustments.
Living within your means won’t make you immune to money worries, but it should help you to prevent fear about your electricity being shut off, or the inability to pay other essential bills.
7. Your Credit Score is Below 650
Your credit score is often an indicator of your financial health. It’s very possible to have a low-to-moderate income and still have a high credit score. And it’s also to possible to have a high income and a low credit score. How you manage your money is more important than how much you make.
The average credit score for Americans is 675, according to Experian. If your score is below 650, it may be a sign that you are living above your means or not managing your money as well as you should be. A below average credit score can hurt your chances for credit and increase the interest rates you’ll pay. (Not sure what your credit score is? Get your free score from Credit Karma.)
8. You Spend More Than 28% of Your Income on Housing
As a general rule of thumb, you should not be spending more than 28% of your gross income on housing expenses. Your housing expenses could be rent, or the total of your monthly mortgage payment, property taxes, and homeowner’s insurance.